This summary is based on the second quarter fiscal 2008 earnings call conducted by E*TRADE FINANCIAL Corporation (ETFC) on July 22, 2008.
Management:
Chairman & CEO: Donald Layton
President of E*TRADE Bank: Robert Burton
Acting Chief Financial Officer, Executive Vice President and Controller: Matthew J. Audette
Managing Director, E*TRADE Securities LLC: Michael Curcio
Key Investors Issues
- EPS were a loss of 19 cents a share compared to a profit of 37 cents a share last year.
- Net loss was $94.6 million compared to net income of $159.1 million a year ago.
- Total revenue was up $3 million to $532 million sequentially.
Second Quarter Highlights
Despite considerable market turbulence, franchise has demonstrated its strength and appeal again this quarter.
- To that end, DARTs were up 7% year-over-year despite the disruption from late last year.
- Net asset flows were $900 million positive or $1.8 billion if adjusting for the sale of RAA business. This is consistent with the level of customer asset inflows the company was able to generate prior to the credit crisis in the second quarter last year.
- Margin was up $700 million or 11% over last quarter, illustrating the strong customer engagement the company is experiencing.
- Customer cash and deposits ended the quarter at $33.7 billion, down less than 1% from last quarter, driven by strong net buying in the equity markets by customers.
- Customer cash and deposits are up $1.8 billion from last year''s low.
- U.S. retail customers were net buyers of approximately $2.2 billion of securities and just over $3 billion year-to-date.
Retail segment income generated $170 million of pre-tax profits.
- While there is some noise in here, including some insurance recoveries, the numbers make clear that the retail franchise is strong, well run and growing.
- Customers are up 22,000 from last quarter and up 90,000 from last year.
- Target segment accounts are up 14,000 from last quarter and 4,000 from last year.
- Total accounts were up 30,000 from last quarter and 196,000 from last year.
The company launched of E*TRADE Mobile Pro, a leading edge platform for use with the BlackBerry smartphone that offers customers many of the features available to them on their desktops.
- During a tumultuous market period, the company confirms that July trading volumes are up nicely compared to June, about 12%, and customer cash and deposits are flat since June 30th.
- The company is no longer counting Canadian accounts or mortgage accounts in account metrics.
Core retail franchise is helping the bank to produce approximately $200 million of profit per quarter before credit costs.
- At June 30th the company had capital ratios of 6.7% that is Tier 1 and 12.2% that is risk-based.
- The company expects to have excess risk-based capital at the bank of approximately $700 to $800 million by year end.
- Liquidity continues to be strong with undrawn Federal Home Loan Bank availability of $10.1 billion in addition to approximately $1.8 billion of cash on the balance sheet of the bank.
Provision expense increased by $85 million over last quarter, driven by an increase in charge-offs of $73 million. $54 million of this increase was home equity related.
- Allowance for loan losses grew by $70 million to $636 million, reflecting view of moderate losses over the next 12 months.
- The company is at the high end of previously disclosed three-year cumulative loss outlook of $1 to $1.5 billion for home equity loan portfolio.
- Early stage delinquencies across portfolio performed well being up by only 2%.
- Allowance as a percent of nonperforming loans or the coverage ratio for one- to four-family portfolio declined from 14.2% to 14% compared to last quarter.
- The growth in total delinquent loans continued to slow.
- Home equity book showed growth in total delinquencies of $25 million or 4%, down from an increase of 8% last quarter. One- to four-family total delinquencies were up $85 million or 13% this quarter, better than the 37% increase last quarter.
- Total delinquencies therefore increased by $111 million or 9%, representing the slowest increase in four quarters.
To date the company has decreased this risk to open lines of credit from $7.2 billion last year to just $3.7 billion at the end of June.
- This 49% reduction results from freezing lines on all accounts as they become delinquent, proactively freezing lines whenever the underlying home equity has been materially impaired, and a surprising level of prepayment on these frozen accounts as frozen customers choose to move elsewhere for their home equity borrowing.
- Beyond the decrease in absolute terms, the risk inherent in the remaining open lines should be minimal. By definition, these accounts have not been delinquent in 2008 and have not had a material deterioration in home value. About half of these open lines are currently unused, that is, they have no current balance. The remaining open lines have strong credit characteristics with a 769 average FICO score and an updated CLTV of only 67%.
